Mesinger Pulse – “It Is New. I Think It Is Real. It Is Fragile.”
I bet you think I am describing a newly laid goose egg! Not at all. I am describing a widespread feeling of optimism in our global aviation industry. I just returned from London having attended and spoken at the 2018 Corporate Jet Investor conference. 550 of the best and brightest industry leaders from the sales, finance and legal sides of the industry. It was virtually a who’s who. Across the board, and for the first time in years, the sentiment was enthusiasm and optimism with attendees speaking of glasses half-full and recovery throughout the two-day event.
There was no one there however who did not balance these sentiments with a dose of reality as to the fragile nature of this euphoric period. This caution was not meant to rob the discussion of what we were feeling, just add what are global risks to many industries, including North Korea, massive cyber-attacks, political winds and a few other sobering phenomena.
So how does this enthusiasm translate for us in our industry? Some of the most obvious examples can be seen in a reduction in almost every category of available inventory. This is partly the result of owners finding renewed use of the assets in their own business and also increased sales activity. A great example of the uptick in use and transactions are the increased number of days it is taking to get into a maintenance facility for a pre-buy. Paint and interior shop backlogs are also growing. Even aviation attorneys report brisk activity levels with new clients and new transaction levels, compounding another phase of a sale. The longer everything takes the riskier sales outcomes become.
It was discussed at the conference that the better aircraft listed for sale are selling quicker, and the threat to waiting longer today to grasp the reality of a more active market with fewer good choices is the loss of the best planes. This is leaving less good choices for buyers who sit on the sidelines and wait.
What is not happening is the phenomenon that occurred in 2004 through 2008 where prices of in-service aircraft went up in value. Hopefully we will never get back to the false economics that planes go up in value every year, and instead come to terms with the idea that these pieces of equipment get older every day and as they age they depreciate. Thankfully the industry is currently seeing the residual quarterly or annual loss rate slowing to a sustainable and manageable rate of approximately 7-10% annually, or even less in some particular cases. For now, gone are the near past loss rates of as much as 25% per year.
Over the last three years, as emerging markets slowed down dramatically and the lion’s share of transaction occurred in North America, activity and sales affected inventory supplies in North America first. So many of the fears of buying planes from countries that did not regularly hangar their planes and/or did not have good and mature management and operational experience, tended to sit in their respective markets and just add supply to what was already an oversupplied segment. Today, as we begin to see signs of renewed global economic growth these planes will begin to sell in their respective regions effecting inventory levels positively. Balance in our markets will be a good thing and bring normalcy to valuation calculations. Good values will bring confidence back in areas sorely lacking over the past ten years.
Now back to the cautionary side of things. Though it is no longer just a buyer’s market, it is also not strictly a seller’s market. The great aircraft are selling first and quicker, so approach the market as a buyer as if you could lose the best buy and replacing it will not be as easy. You will not be alone as a buyer. As a seller I must also throw caution into the equation. You also cannot come into a market and dominate the discussion, but you do have more choice in who you sell to than you ever had in the recent past. It has been many years since balance has existed. Let’s enjoy this renewed health. There will still be great buys and there will now be quicker sales. Prices will not go up, they will just go down more predictably.
On the fragile side of the equation we must all be mindful that any number of calamities can occur globally that could put collective brakes on all of this excitement. We could get pulled back into slowdowns and actual stoppage of forward momentum. Let’s keep our eyes open and be aware. If as a seller on day one you get a good offer, take it. Don’t second guess the market and be greedy, thereby missing opportunities. As a buyer, don’t be afraid to pay the right price for the best plane. I used to say in a buyers’ market the idea of buying a cheap plane cheap was usually tabled with you get what you pay for, a cheap plane cheap. Always approach the market to buy a great plane right. What is right? It is the amount you pay having gotten good market counsel.
The next six months should be very telling as all types of industry markets, not just aviation, come to grips with growing global economies again.